For years, automobile insurance prices have been determined by slicing the driving public into broad bundles of statistics.
Young male? Higher cost. Married? Lower cost. Commute to work? Higher cost. And so on.
Many motorists complain that this system, though it seems to work in the aggregate, lumps together drivers whose behavior more than justifies higher premiums while also including those who drive more safely. As a result, lower-risk members of a statistical group end up subsidizing higher-risk drivers in that group.
Recently, however, at least one insurer has been experimenting with a system that tracks motorists' driving patterns and tries to price coverage to match.
The system, which has been operating in Houston for about 15 months and is now being rolled out across the rest of Texas, combines global-positioning satellite and cellular telephone technology so the carrier, Cleveland-based Progressive Insurance Co., gets a record of where the car has been, and when.
"We use GPS and cellular technology to get actual usage data from the vehicle, and we're able to provide auto insurance by the mile," said Bob McMillan, director of consumer marketing for Progressive.
"What happens is, the technology on board the vehicle logs the position of the vehicle every six minutes. Our central computer calls the car once a month and the car tells it where it's been," McMillan said, so a driver's premium level is "individualized, based on when and where and how much you drive."
While only a relatively small number of drivers have signed up for the program, dubbed Autograph, many of them are finding their premiums reduced by 25 percent and some are seeing savings of 50 percent to 60 percent, McMillan said.
The program especially benefits drivers with very short commutes or those who have a second or third car that isn't driven much. "Those situations are turning out to be big winners," he said.
Progressive doesn't yet have enough data to tell whether its estimates of loss probabilities, and thus its pricing, are correct. McMillan said that the company is studying the results and will do further research but that it's too early to know where that will head.
Others in the industry are watching with interest and applaud Progressive's efforts. But several said it's not certain that Autograph will outperform the tried and true method of basing rates on factors such as age and territory as well as mileage.
"It remains to be seen whether this is going to be any more accurate than other rating systems," said David F. Snyder, assistant general counsel of the American Insurance Association, a trade group of property insurers.
But he said Progressive's system is worth a try and he hopes regulators will not stand in the way of it or other such efforts. "It is an example of what ought to go on in a competitive market," he said.
The system captures a great deal of information about the driving habits of the insured driver and his or her family.
Robert Hunter, former Texas insurance commissioner and now with the Consumer Federation of America here, said there are potential benefits but it could raise serious privacy issues. Whether consumers will benefit isn't clear, he said.
"It can be used in a very '1984' sort of way," though it could also work to eliminate inequities in current pricing, he said.
For example, current rating systems treat all commuters alike, whether they are driving in heavy traffic at rush hour or in light traffic at an odd time or in an unusual direction. Correcting for that would seem fair, Hunter said.
"I'm not trying to be totally negative. It could be positive if it's implemented properly," Hunter said.
Progressive's equipment captures miles driven, the location of those miles and the time of day they are driven.
It also captures speed, though McMillan said that isn't currently used in setting premiums. "We haven't seen a strong correlation between just exceeding the speed limit and chance of loss," he said.
The company's research has found that time of day has a strong correlation to risk, McMillan said. "A mile driven at 8 a.m. is eight to 10 times safer than a mile driven at midnight, so we vary pricing by time of day," he said.
The company also divides the cities into three to five "risk zones" based on historical data on accidents and thefts and charges more for miles driven in high-risk zones.
Autograph participants are billed each month for their driving, and receive a personal profile showing how many miles they drove, broken down by time of day and risk zone. The bill consists of a fixed premium--which includes the cost of the on-board equipment, $1 a month for the first car (a special introductory price) and $15 a month for additional cars--and a usage premium. The company likens it to a telephone bill.
"Consumers have never had that kind of record of their personal travel and it's very interesting," McMillan said.
"We do see the first signs of behavior change," he added. For example, "one lady who used to drop her laundry off in afternoon now does it in the morning because there's a small difference in the price per mile."
Progressive also offers a variety of optional services made possible by the on-board equipment.
The GPS system, of course, is quite useful if the car is stolen, and "we discount theft insurance very deeply," McMillan said. "The big winners are people with high-end vehicles. The car might be stolen, but we're going to get it back."
Motorists can also get low-battery warning, navigation assistance, roadside assistance, two-way communication with Progressive, a "panic button" for help, and, if the car has power locks, remote door unlocking in case the driver locks the keys in the car.
Whether this system spread beyond Texas will depend, of course, on its popularity, regulatory acceptance and whether the information it provides turns out to correlate to losses.
And drivers will have to balance the potential savings against the privacy questions raised by the system's ability to track their movements. Do you want your spouse knowing you were driving in a high-risk zone at 2 a.m., for example?
The company expects high-mileage, high-risk drivers to stay with traditional insurance, but if Autograph allows it to attract a large number of motorists who do most of their driving at 8 a.m on Sunday, that'll be just fine.